Bearish Stock Market - What it Means

A bearish stock market is one in a sustained downturn, with falling stock prices and declining activity volumes. It is the reverse side of a bullish stock market. A bear market is a shy, recoiling market, with a withdrawn sentiment, very much the opposite of the charging spirit of a bullish market.

When events throw the market into a fearful, restrained mood and diminishing interest in buying stocks, with the results that prices stay in decline, we speak of a bearish market period. Statistically, a sustained decline of the market, hitting up to 20%, is technically defined as a bear market.

Many factors can trigger a timid market temperament. Overall downturn in the economy, for instance. If a depression has set in and companies are expected to witness declining performance, which in turns spells poor returns on investments, the enthusiasm to buy stocks will fizzle off. Any factor that throws investors into a lukewarm disposition to buying stocks, leading on to declining prices over a significant stretch of time, has thrown the market into a bearish mood. When the market is bearish, the demand for stocks collapses, investors are anxious to sell off to avoid losing more to falling prices, giving rise to an oversold market. Prices can fall rapidly in such bear trend, throwing investors into heavy losses.

Stock prices tend to fall well below the value of the individual companies in a bearish. With substantial losses to investors, they not only want to turn their backs to stocks, they want to salvage anything from existing holdings by selling off, leading to floor prices for stocks. That's why it's often said that such bear markets also present an opportunity to those who want to buy into new positions. Buying stocks at such low prices creates a major potential for wild profits, if and when the market subsequently recovers and clocks up. In the face of the challenges of extensive market decline, though, getting potential investors to risk putting money into the market is the hard part. Nobody wants to burn his fingers and the seemingly low prices may fail to present enough pull to many of them.

The Nigerian stock market took a bear turn late in the first quarter of 2008. Since then, the All-share index of the Nigerian Stock Exchange has declined from a high above 66,000 points to below 20,000 points in one year of massive price decline. The Nigerian stock Exchange's market capitalisation has similarly collapsed from over N12.6 trillion, to below N4.5 trillion, as at April 9, 2009. Obviously, this has been a major setback for the Nigerian stock market, which was already carving a profile as a top-earning market. The effort hitherto made by the Nigerian Stock Exchange to boost awareness and attract more investors into the market - an effort that was getting to bear results - has also taken a serious about-turn. Investors in the Nigerian stock market are beginning to learn that stock prices hardly go in one direction. The reality of losing money in the stock market has also hit home. Now, it's clear to all that not just care, but techniques for market success, are required.

Dealing with a bearish market presents its strategy challenges. The more difficult part is as to what to do with existing holdings, when the market has recorded a major decline. Many want to sell out and cut their losses, which is why prices continue to fall. Those who argue against this action make the point that, until a sell is made, any loss in value does not really crystallize. In fact, if the stockholder keeps his portfolio in tact until the market recovers, nothing is lost. Rather, the challenges of re-entry are eliminated.

Ideally, if you can sell early in a downturn, it provides the opportunity to take earned profits and re-enter the market at the bottom, which immediately incredibly raises the investor's wealth potential. It should be noted that getting this exit-and-re-enter strategy deftly executed may prove tough, but if successfully done, will boost the investors portfolio value.

Another major challenge is in knowing when to move into the market. It's difficult to call the bottom of the market, until well after it has been established. The declining market will have several bouts of false recovery, which may serve as traps to lure investors into a yet falling market. The true bottom is hard to tell, meaning that one must follow the market closely and watch the activity patterns. There will, at least, be evidence that investors are steadily returning to the market, reflected in growing volumes.

One important point: the bear market is always lurking in the corner, even in a bullish market. It takes over when the market bubble is burst. For the investor, the lesson is to always prepare for it. Otherwise, even your capital, not to talk of the gains on your investment, could be gone in a span of bear madness. A bearish market can inflict pain and anguish, because losses could get huge. That's the reason every stock investor needs strategies that protect his portfolio from severe damage in a bear market turn and in fact help him to take advantage of a decline. Tall order, but that's how best to make wild profits in the stock market.

Understanding Bearish Stock Markets

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